Cement prices continued to decline for sixth consecutive month in December, which is going to hit realisations of cement companies in the quarter ended December 2018, Kotak Institutional Equities said. The research house has maintained cautious stance on the space by assigning sell rating for three stocks, reduce for two and add for five scrips.
All-India cement prices declined by Rs 3 per bag month-on-month to Rs 317 per bag in December 2018 and prices fell by Rs 15 per bag since July 2018.
As per channel checks, Kotak said cement prices in December 2018 declined in 1) South region by Rs 7 per bag MoM to Rs 320/bag, (2) North, Central and East regions by Re 1 per bag to Rs 301/bag, Rs 327/bag and Rs 331/bag, respectively. However, prices increased only in West region in December 2018 by Rs 2 per bag to Rs 304/bag.
Based on price trends as per channel check, Kotak estimates Q3FY19 realisations for cement companies to fall by 1-3 percent QoQ.
Imported pet-coke prices declined by 4 percent MoM to $94 per tonne in December 2018 and domestic prices are down by 9 percent from average of Q2FY19. Companies source a larger part of their pet-coke requirement (around 60 percent) from domestic sources.
Kotak expects cost savings from lower pet-coke prices to largely reflect from Q4FY19 due to (1) high cost inventories—companies usually carry 45-60 days of inventory, and (2) moderate fall in domestic prices.
The research house further expects logistics cost in Q3FY19 to decline led by (1) lower diesel costs, and (2) gains from increase in axle load limit (for a few companies where full benefits are yet to flow in earnings).
However, cost savings will be partially offset by increase in railway freight due to imposition of busy season surcharge from October 2018, Kotak said.
Among regional names, the brokerage house expects spreads (difference between prices and energy costs) in Q3FY19 to be weak for companies in South, West and East regions despite cost savings due to weak cement prices.
It further expects volume growth, also, to moderate from November, though industry volumes increased by 18 percent YoY in October 2018.
Hence, overall Kotak maintained its cautious stance on the cement sector on expensive valuations and on expectation of moderate improvement in earnings over the next two years.
It said earnings improvement is dependent on increase in cement prices which is contingent on improvement in industry utilisations. However, it believes large capacity addition will keep industry utilisations low (below 70 percent) over the next two years.
Valuations of large cap cement names is expensive at 13-22X FY2019E EV/EBITDA, the research house feels.
Hence, Kotak has sell rating on ACC, Shree Cement and UltraTech Cement; and reduce call on Ambuja Cements and India Cements while it advised adding Grasim Industries, Dalmia Bharat, JK Cement, JK Lakshmi Cement and Orient Cement.
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Source: Moneycontrol
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